BNY Accused by New York of Violating Law in Trustee Role

Bank of New York Mellon Corp. violated New York state law by misleading investors, state attorney general’s office said. Photographer: Jonathan Fickies/Bloomberg

Aug. 5 (Bloomberg) -- Bank of New York Mellon Corp.
violated state law in its role representing investors in
mortgage securities created by Bank of America Corp.’s
Countrywide Financial unit, the New York Attorney General said.

BNY Mellon should pay penalties and restitution to
investors, Attorney General Eric Schneiderman said yesterday in
a court filing involving Bank of America’s proposed $8.5 billion
mortgage-bond settlement. Schneiderman, who said he has
“potential claims” against Bank of America, called the
settlement unfair to investors and asked a judge to reject it.

“The proposed cash payment is far less than the massive
losses investors have faced and will continue to face,”
Schneiderman said in the filing in state court in Manhattan.

Under the proposed deal, which requires court approval,
Bank of America would pay $8.5 billion to resolve claims from
investors who wanted the Charlotte, North Carolina-based bank to
buy back loans that were packaged into bonds. The agreement was
reached with 22 institutional investors and BNY Mellon, which
acts as the trustee for the mortgage-securitization trusts. The
deal would apply to other investors in the trusts.

‘Heightened Duty’

Delaware Attorney General Beau Biden also intends to
intervene in the Bank of America case, Ian McConnel, a deputy
attorney general at the office, said at a court hearing today
about the agreement. Delaware public pension funds may be
investors in the Countrywide bonds and some of the trusts in the
settlement were established under Delaware law, McConnel said in
an interview after the hearing.

Schneiderman claims New York-based BNY Mellon was aware of
“loan documentation deficiencies,” such as Countrywide’s
improper assignments and transfers of notes needed for
foreclosures. That knowledge triggered a “heightened duty” to
bondholders, he said.

Countrywide’s failure to transfer complete mortgage loan
documentation to the trusts hampered the ability of the trusts
to foreclose on delinquent mortgages, impairing the value of the
securities backed by the mortgages, Schneiderman said.

BNY Mellon spokesman Ron Gruendl, said in an e-mail that
the bank “fulfilled in all respects” its responsibilities as
trustee.

‘Outrageous, Baseless’

“The allegations by the New York Attorney General are
outrageous, baseless, unsupported by fact and law, and we will
fight them if necessary in court,” he said. “The AG’s action
is misguided and fails to comprehend the role of the trustee and
the benefit the settlement would provide to investors.”

Bank of America and Countrywide separately face liability
for “persistent illegality” in breaching contractual promises
about the quality of loans, as well as failing to provide
complete mortgage files, Schneiderman said in court papers.

Lawrence Grayson, a spokesman for Bank of America, declined
to comment.

The attorney general’s action “raises significant doubt”
that the $8.5 billion settlement will move forward as proposed,
JMP Securities said in a research note.

‘Limited Role’

Asked about a February lawsuit by investors who had been
unable to get it to sue Countrywide after being presented with
evidence of loans being of lesser quality than represented by
than lender, Kevin Heine, a BNY Mellon spokesman, said then that
the trustee has “a limited role that is distinct from the
seller and the servicer and contractually limited by the pooling
and servicing agreements.”

That case, by anonymous investors behind a series of
limited liability companies named Walnut Place, included BNY
Mellon as a nominal defendant.

The case is In the matter of Bank of New York Mellon,
651786/2011, New York State Supreme Court, New York County
(Manhattan).